World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Tuesday, September 8, 2009

While the whole world of “economic experts” are talking about and bracing for inflation, consumer credit (credit being the largest part of the money supply) is CONTRACTING at a RECORD PACE.

That’s what exponential curves do when they have peaked. The math does not allow anything to grow unabated year after year into infinity, that only occurs in the minds of idiot politicians and poorly trained economists who received their education in the land of fiat – America.

Here’s the data according to Econoday... the experts consensus was for a contraction of $4.1 billion, actual contraction was $21.6 billion for July:

HighlightsContraction in consumer credit reflects rising consumer caution as well as banking efforts to limit lending exposure. Consumer credit contracted $21.6 billion in July, a very severe reading and the largest on record. At $15.5 billion, June's contraction was also severe ($10.3 billion initially reported). July's contraction is the sixth in a row for the longest streak since the credit squeeze of 1991. Nonrevolving credit led the decline, at minus $15.4 billion in a surprise given cash-for-clunkers which kicked off late that month. It would be a big surprise if there was another deep contraction in non-revolving during August. Revolving credit in July fell $6.1 billion. The markets may ignore this report but policy makers won't as it works directly against their efforts to stimulate spending.

So, even with Cash for Clunkers the contraction was the largest on record! What will it be without?

I’ve been warning that we are on the verge of a deflationary spiral, the data keeps coming in to support that view. Below are the latest graphs from the St. Louis Fed. Year over Year numbers below zero mean the supply of credit is shrinking:

Total loans and leases at commercial banks – negative yoy, the most since 1976:

Total Revolving credit outstanding – negative yoy, the most ever recorded by the modern Fed:

Total Nonrevolving credit outstanding – negative yoy, the most since the early 90’s, I’m sure it would far surpass that if not for government loan programs provided by the likes of FNM, FRE, and the FHA:

Total consumer credit is contracting, and the rate of contraction is accelerating:

As far as derivatives of consumer debt… Securitized total consumer loans are falling at nearly a 10% pace year over year:

Sure the government is going to create inflation, right up to the point that all confidence in our currency is lost. Today they auctioned off tens of billions more in public debt. The supposed bid to covers were high, but they were FAKE BIDS made by the Primary Dealers who are buying up the debt and then selling it right back to Uncle Sugar. The game is not enough, the money they create cannot go into the economy because the economy is saturated with debt and all new money simply goes to pay it down. It’s a game that is going to end in tears, and already has for millions of unemployed and their families.

Today’s action took the dollar’s daily chart right to the bottom of a descending wedge formation:

If that normally bullish formation breaks down, it’s likely to be violent and you can see that the next support can be found all the way back down in the 71 area on the weekly chart: